by Jack Roviere

Created on: April 24, 2008   Last Updated: June 14, 2008

"If you build it, they will come," or so the movie Field of Dreams goes. But is this really practical information for a businessperson?

Yes. And no. Obviously, if people are purchasing your product or using your service, then your revenues will increase...but profit is not just revenue. When you are faced with expenses, how can you minimize those? It's a question that some business think is second-tier to the cost of attracting people to the product in the first place, while others wisely recognize that the answer to such question can have just as big consequences as the revenue question.

How can you even know where your expenses have come from? Cost accounting is a branch of managerial accounting designed to help management answer these questions and more. Cost accounting takes the jumble of numbers and associates them with the drivers that created those numbers, so that managers can find who is responsible for as much cost as possible.

One of the reasons cost accounting is so helpful is because of the way business works - essentially, when you account for your business activities, you are attempting to corral a continuous, fluid business into artificial and arbitrary periods (fiscal years, usually). In many situations, you have to make decisions based on which costs should be expensed and which should carry over into the next term. In keeping with accounting's revenue-cost matching principle, generally you want to expense when you realize revenue as well...all of this just allows for more choice in costing methods, of course.

For example, you might decide to use an activity based costing method. This methodology works under the assumption that you incur costs as a result of some activity, so you should assign costs according to cost centers and cost pools. If you are using a process-based ABC system, then you might decide that there are specific costs related to each line of an assembly plant. For example, if you are producing furniture, then your business might feature a construction department, a polishing department, and a painting department. Under process-based activity costing, you might assign costs according to where the product is in development. You might start with direct materials (wood, etc.,) in construction, transition to a work in process at that construction department, and then when construction is completed the good moves on to the polishing department. The good is "finished" in relation to construction, but is still a work in process in relation

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